This document discusses the economics of ideas, focusing on non-rivalrous and excludable goods like ideas. It introduces the concepts of rivalrous vs. non-rivalrous goods and how ideas are non-rivalrous but can be made excludable. This gives rise to increasing returns and imperfect competition in markets for ideas. The document also presents a basic Romer-style model of endogenous growth driven by increasing returns from new ideas. It questions whether growth will continue indefinitely and discusses challenges to US growth from factors like demographics, debt, and environmental constraints.

1. The Economics of Ideas
RISE OF ASIAN ECONOMIES-JANUARY 2015-SESSION 7

2. Does Pythagoras own his theorem?
 Why is that question important (or not important) ?
 What is in the nature of the theorem, if we consider it as an IDEA?
 How did the theorem diffuse across the world? What has been its uses?
 Were there market incentives to encourage
ideation/adoption/diffusion/implementation of the theorem?
 What are other theorems that build on Pythagoras Theorem?

3. Rivalrous Non-Rivalrous
High Excludability
Low Excludability
Ideas are Dime a Dozen…
What About their Broad Nature Though?
 Thinking about Ideas as Goods
 Rivalrousness & Excludability
Source: Romer (1993)

4. Rivalrous Non-Rivalrous
High Excludability Lawyer Services; CD
Player
Encoded Satellite TV
Transmission; Computer Code
for a Software Application
Low Excludability Fish in the sea
Basic R&D; National Defense;
Calculus
Ideas are Dime a Dozen…
What About their Broad Nature Though?
 Thinking about Ideas as Goods
 Rivalrousness & Excludability
Source: Romer (1993)

5. Rivalrous Non-Rivalrous
High Excludability Lawyer Services; CD
Player
Encoded Satellite TV
Transmission; Computer Code
for a Software Application
Low Excludability Fish in the sea
Basic R&D; National Defense;
Calculus
The
Commons
Ideas are Dime a Dozen…
What About their Broad Nature Though?
 Thinking about Ideas as Goods
 Rivalrousness & Excludability
 Remember R & I in the VRIO framework? Source: Romer (1993)
At The
Margins?
Public
Goods

6. Non-Rivalrousness & Low Excludability
Gives Rise to?
 Spillover possibilities & Externalities
 Non-Rivalrous Goods have a fixed cost of one-time production in contrast
to Rivalrous goods.
 Ideas are Non-Rivalrous (excludable only through market-mechanisms)
 Gives rise to INCREASING RETURNS & IMPERFECT COMPETITION
 Central to Economics of Ideas
“If you think of [opportunity] in terms of the Gold Rush, then
you’d be pretty depressed right now because the last nugget of
gold would be gone. But the good thing is, with innovation,
there isn’t a last nugget. Every new thing creates two new
questions and two new opportunities.” Jeff Bezos, founder of
Amazon

7. Central Philosophy Behind …
Romer Model & Endogenizing A
IDEAS
NON-RIVALRY
INCREASING
RETURNS
IMPERFECT
COMPETITION

8. Unlike Solow Model..
Technology is no longer a Manna from Heaven

9. But What About Technology & IR – Example?
 Iron Oxide earlier used in Neanderthal Paintings were later on used in Magnetic Tapes
 Quality Adjusted Price of Light has fallen 4000 times since 1800 (Nordhaus 1994)

10. But if Ideas are so important..
How do they impact Economic Growth?
“A surprising number of innovations fail not because of some fatal technological flaw or because the
market isn’t ready. They fail because responsibility to build these businesses is given to managers or
organizations whose capabilities aren’t up to the task…Most often the very skills that propel an
organization to succeed in sustaining circumstances systematically bungle the best ideas for disruptive
growth. An organisation’s capabilities become its disabilities when disruptive innovation is afoot.”
Clayton Christensen, academic (1952–), The Innovator’s Dilemma (1997)
“Innovation is the specific instrument of entrepreneurship. The act that endows resources with a new
capacity to create wealth.”
Peter Drucker, management writer (1909–2005), Innovation and Entrepreneurship (1985)
“Ideas rose in clouds; I felt them collide until pairs interlocked, so to speak, making a stable combination.”
“Invention consists in avoiding the constructing of useless contraptions and in constructing the useful
combinations which are in infinite minority. To invent is to discern, to choose.”
Henri Poincaré, mathematician (1854–1912), Essay on the Psychology of Invention in the Mathematical Field

11. But if Ideas are so important..
How do they impact Economic Growth?
“The opening up of new markets, foreign or domestic, and the
organizational development from the craft shop and factory
to such concerns as U. S. Steel illustrate the same process of
industrial mutation-if I may use that biological term-that
incessantly revolutionizes the economic structure from within,
incessantly destroying the old one, incessantly creating a new
one. This process of Creative Destruction is the essential fact
about capitalism.” – Schumpeter in CSD
Ultimate Description of Creative Destruction:
“Large corporations welcome innovation and individualism in
the same way the dinosaurs welcomed large meteors.”
Who said that?

12. A Little Bit of Math is Good for Health 
A Bare-Bones Romerian Idea-Model 1/5
Y = Kα * (A*LY )1-α
Solow Model: 𝒌 = sY-(n+d)k
- But let’s say, the rate of ideas is a function of ideators & ideation-rate in the economy,
thus:
𝑨 = 𝜹 LA –------- (1)
where LA + LY = L

13. A Little Bit of Math is Good for Health 
A Bare-Bones Romerian Idea-Model 2/5
The rate at which ideas are discovered might be dependent on initial stock of ideas, positively
or negatively, which implies:
𝜹 = 𝜹 ∗ 𝑨 𝝋 -------- (2)
- Where 𝝋 < 𝟎, 𝝋 > 𝟎 & 𝝋 = 𝟎  have their intuitive explanation, what?
o IR (SSG effect), FO effect, Independence effect.
o Knowledge spillover parameter at the ideators level.

14. A Little Bit of Math is Good for Health 
A Bare-Bones Romerian Idea-Model 3/5
Now 1 + 2 gives us:
𝑨 = 𝜹 ∗ 𝑨 𝝋
LA
or more intuitively: 𝑨 = 𝜹 ∗LA
β * 𝑨 𝝋
---- 3
where 0 < β < 1 – indicating what?
(the stepping on the toes effect capturing duplication)

15. A Little Bit of Math is Good for Health 
A Bare-Bones Romerian Idea-Model 4/5
- Now on to Ideas & Growth:
- W/some leap of faith & reading of Chapter 2, you will know that during balanced growth:
gy = gk = gA
gA =
𝑨
𝑨
but 𝑨 = 𝜹 ∗LA
β * 𝑨 𝝋
as in Equation 3 above.
So, dividing by A on both sides gives us:
𝑨
𝑨
= (𝜹 ∗LA
β ) / ( 𝑨 𝟏−𝝋
)

16. A Little Bit of Math is Good for Health 
A Bare-Bones Romerian Idea-Model 5/5
RHS of right hand side can only be a constant (gA) if numerator and denominator grow at the
same rate, thus:
𝟎 = 𝛃 ∗
𝑳 𝑨
𝑳 𝑨
− (𝟏 − 𝝋)
𝑨
𝑨
𝑨
𝑨
= (𝜹 ∗LA
β ) / ( 𝑨 𝟏−𝝋 )
Or rearranging:
gA =
𝜷∗𝒏
(𝟏−𝝋)

17. In English Language at last 
- Growth in ideas in the steady state drives growth in output.
- In theory, growth in ideas is increasing
- in duplication parameter
- growth rate of ideators/innovators/researchers in the economy
- and the knowledge spillover parameter of ideas.

18. Some Associated Questions
- How will you test all of these empirically & make policy/managerial
recommendations?
- What has research found?
- Can we differentiate based on the quality of ideas? Look up Basic versus Applied
Research / Radical versus Incremental Innovation
- How about the nature of ideators? Look up Pasteurs Quadrant.
- What role here is of incentives for innovation?
- Short run versus long run effects?
- Why is the market for ideas an imperfectly competitive market?
- Agglomeration economies in ideas? Look up the Anchor-Tenant Hypothesis
- Spin-offs and nano-economics? Klepperian Economics.

19. Dude – What is the Asia Story?
- Less of Innovation & More of Imitation
- Access versus Innovation – The Societal Debate
- Intellectual Property’s Burial Ground
- Trans-Pacific Partnership
- China’s Rise in Innovation
- Japan lies as an outlier
- Low-Cost Innovation (Frugal?)
- But Asian Innovation is Changing Pioneered by the Rise of
Koreans, Chinese, Japanese and now a tinge of Indian
Firms

20. Fast Facts – on Asian Innovation
 In Asia alone, there are almost 9 mobile phones for every 10 people. With 3.5 billion mobile subscriptions, consumers in
Asia and Pacific now account for more than half of the world’s total mobile service market.
 Testing ground for Marshallian Scissors
 PRC and India, have doubled their research and development (R&D) investments and increased their share of R&D in
2007-12 to nearly 20% of the world total.
 Will The Vannevar Bush Linear Model of Research Work?
 Asia’s Innovative Labor Market Gap: By 2020 in Asia, it is estimated there will be a shortage of 38 million-40 million
highly skilled (college educated) workers, a shortage of 45 million medium-skilled (secondary education) workers and a
surplus of 90 million-95 million low skilled workers.
 It’s All in the Idea/Ideators stupid? Can Asia scale up beyond primary to higher education?
 Cloud computing is expected to generate 14 million jobs globally by 2016, with 10 million coming from the PRC, India
and the wider Asia Pacific region.
 So What?
 The PRC; Hong Kong, China; and India were among the top 10 exporters of creative goods in 2008, accounting for over
30% of total global exports.
 How much of these are IP protected creative goods?
 Expect tons of Frugality Oriented Business Model Innovation to ride past Institutional Impediments
Source: Asian Development Bank

21. Asia on a Creativity Index
http://www.thinglink.com/scene/565367039070306305
Source: Asian Development Bank

22. But What is Happening to Innovation in US?
Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds
Robert J. Gordon
This paper raises basic questions about the process of economic growth. It questions the assumption, nearly universal since Solow's seminal
contributions of the 1950s, that economic growth is a continuous process that will persist forever. There was virtually no growth before 1750, and
thus there is no guarantee that growth will continue indefinitely. Rather, the paper suggests that the rapid progress made over the past 250 years
could well turn out to be a unique episode in human history. The paper is only about the United States and views the future from 2007 while
pretending that the financial crisis did not happen. Its point of departure is growth in per-capita real GDP in the frontier country since 1300, the U.K.
until 1906 and the U.S. afterwards. Growth in this frontier gradually accelerated after 1750, reached a peak in the middle of the 20th century, and
has been slowing down since. The paper is about "how much further could the frontier growth rate decline?“ The analysis links periods of slow and
rapid growth to the timing of the three industrial revolutions (IR's), that is, IR #1 (steam, railroads) from 1750 to 1830; IR #2 (electricity, internal
combustion engine, running water, indoor toilets, communications, entertainment, chemicals, petroleum) from 1870 to 1900; and IR #3 (computers,
the web, mobile phones) from 1960 to present. It provides evidence that IR #2 was more important than the others and was largely responsible for
80 years of relatively rapid productivity growth between 1890 and 1972. Once the spin-off inventions from IR #2 (airplanes, air conditioning,
interstate highways) had run their course, productivity growth during 1972-96 was much slower than before. In contrast, IR #3 created only a short-
lived growth revival between 1996 and 2004. Many of the original and spin-off inventions of IR #2 could happen only once - urbanization,
transportation speed, the freedom of females from the drudgery of carrying tons of water per year, and the role of central heating and air
conditioning in achieving a year-round constant temperature. Even if innovation were to continue into the future at the rate of the two decades
before 2007, the U.S. faces six headwinds that are in the process of dragging long-term growth to half or less of the 1.9 percent annual rate
experienced between 1860 and 2007. These include demography, education, inequality, globalization, energy/environment, and the overhang of
consumer and government debt. A provocative "exercise in subtraction" suggests that future growth in consumption per capita for the bottom 99
percent of the income distribution could fall below 0.5 percent per year for an extended period of decades.
Source: http://www.nber.org/papers/w18315 & http://www.washingtonpost.com/blogs/wonkblog/wp/2014/02/24/qa-why-robert-gordon-thinks-
growth-is-over-and-what-we-can-do-about-it/

23. Let’s Listen to Bob Gordon’s Arguments
Listen later to Erik Brynjolfsson’s counter-arguments
http://www.ted.com/talks/robert_gordon_the_death_of_innovation_the_end_of_growth?language=en

24. Tomorrow
- What is the Singapore model of economic growth & development?
- What role is there of innovation in Singapore?
- Compare and contrast Singapore with HK?
- Compare and contrast Singapore/HK with Japan

25. So Whose Theorem was it? Pythagoras or…?
Did India discover Pythagoras theorem? A top mathematician answers
Last updated on: January 09, 2015 15:20 IST
The Pythagoras theorem 'should either be an Egyptian theorem if you look at the
standard of just having an idea about it, an Indian theorem if you're looking for a
complete statement of it, or a Chinese theorem if you're looking for the proof of it,'
Fields Medal winner and Princeton University Professor Dr Manjul Bhargava tells P
Rajendran/Rediff.com
http://www.rediff.com/news/special/did-india-discover-pythogoras-theorem-a-top-mathematician-answers/20150109.htm